Can a credit union hold my car title if my other accounts are not paid with them?

Recently on our forum a user asked, “I have multiple accounts at a credit union, including a car loan. If I default on one or more of my accounts is it legal for the credit union to retain my car title?”

This user’s question refers to a term called cross-collateralization. Under this process, the credit union uses one loan, generally a secured loan for a home or a car, to secure other loans the borrower has with that same entity.

Cross-collateralization offers additional security for the credit union by using an asset as collateral for other loans such as credit card debt or personal lines of credit. If you fail to pay a credit card or personal loan that is cross-collateralized the credit union may have the legal right to repossess the car or refuse to give you the title for the vehicle.

Credit unions have long been praised for their generous loan terms, but the process of cross-collateralization has brought criticism, especially for their harsh default terms. But the practice, even though it is criticized, is very common and is fully documented in credit union loan documents.

What do I do about cross-collateralization?

First, while experts note that cross-collateralization does reduce the risk of lending, it should give pause to borrowers who may be better served by having different accounts at different credit unions, especially with the unpredictability of the current economy.

Next, borrowers should be sure to read all loan documents before they sign on the dotted line. Ask questions and make sure you understand the terms of your loan.

Although it’s not unusual to only consider the credit union loan interest rates, which have averaged 1.05% lower than banks, or to focus on low monthly payments, reviewing the fine print and understanding the terms of the loan and what could happen to your car loan if you default on other accounts is just as important.

So what language should you look for? Different credit unions will use different language, but generally, you need to review your loan documents to see if it says anything about how the collateral securing other loans with this credit union may be used to secure additional loans.

Should I avoid credit unions?

Most experts agree there is no reason to completely avoid credit unions. In fact, most borrowers will find credit unions can offer more competitive interest rates than banks or other lenders, and they may also be more willing to make loans.

Every borrower, however, should understand the terms of their loans and consider using other lenders if they fear they could ever face a default.

Bottom Line:

If you have signed an agreement which allows the credit union to use your car as cross-collateralization for other loans the bank is legally allowed to retain your car until your other debts are fully paid. Additionally, if you decide to file Chapter 7 bankruptcy and want to keep your car, not only would you have to pay for the car, but the unsecured debts, which might have been dischargeable in most cases, would have to be paid as well.